MOFCOM, Wal-Mart and the VIE

On August 13, 2012, the Ministry of Commerce (MOFCOM) approved Wal-Mart’s proposed acquisition of 33.6% share of Niu Hai Holdings, which gives Wal-Mart a controlling stake in the online direct sales business of Yihaodian, the largest e-supermarket in China.

Niu Hai is a Hong Kong company that apparently operates in China through a VIE much like other Internet companies in China. MOF allowed Wal-Mart to acquire an interest in Niu Hai, but on the condition that Wal-Mart not use the VIE to sell Wal-Mart’s products. What appears to be notable is that MOFCOM has specifically mentioned a VIE.

Stan Abrams of China Hearsay writes of three ways he could argue the meaning of this:

1. MOFCOM’s warning about the use of the Yishiduo VIE suggests that it is adopting a policy of closer scrutiny of such structures. Investors beware! (King & Wood’s Susan Ning supports this interpretation.)

2. MOFCOM’s specific acknowledgement that the target company for which it is giving an approval operates a VIE structure is as close to a formal recognition of the legality of VIEs that we are going to get. Investors celebrate!

3. MOFCOM’s chief concern with this approval was competition in the retail space. Yihaodian could just as easily owned the country’s largest trucking or warehousing business instead of a VIE-operated e-commerce platform. MOFCOM seems neutral on VIEs and will probably only deal with them on a case-by-case basis. Investors go back to sleep!

My view is that this case is evidence that MOFCOM is well aware of VIE structures, but is not doing anything in this case other than making sure Wal-Mart does not expand the use of Niu Hai’s existing VIE. I don't think that Chinese regulators have decided what to do with VIEs.